Morgan Keegan investors critically affected by the subprime mortgage crisis are taking a stand. Recent allegations claim the company inadequately managed funds and unjustly explained losses during the subprime market collapse. Many investors are also accusing Morgan Keegan of fraud because they presented these funds as “safe and stable investments.”

One investor seeking to recover damages filed an arbitration claim with FINRA against Morgan Keegan for $4 million last week.

The claim alleges misrepresentation and omission of information in its registration statements and prospectus releases with regard to the funds’ investments in collateralized debt obligations, resulting in exposure to the subprime mortgage market. Further damages came from false and misleading statements issued by Morgan Keegan with regard to the funds’ safety, and capacity to generate income.

The damages are in connection with the sale of unsuitable funds which include; the RMK High Income Fund (RMH), the RMK Multi-sector High Income Fund (RHY), the RMK Advantage Income Fund (RMA), the RMK Strategic Income Fund (RSF) and the Regions MK Select High Income fund (MKHIX).

There are many other investors in the same situation hoping to recover varying amounts in claims already filed against Morgan Keegan.

Charities and other smaller investors have also been affected by Morgan Keegan. Last October Maddox Hargett & Caruso represented an Indiana-based charity by filing a FINRA claim regarding a loss in a RMK fund totaling almost $50,000.

Investors, big or small, are choosing the arbitration process to recover their damages instead of waiting for a class action lawsuit that could take years to settle. We encourage all investors of Morgan Keegan funds to contact us.

As the landscape begins to clear for some holders of auction rate securities, for those holding $85 billion of such securities backed by student loans, the future is not so bright.

Student loan-backed auction rate bonds, sold as safe, liquid, cash equivalents, have been one of the worst performing segments of the market.  The problem is that the issuers of these student loan ARS have little or no ability to raise additional funds to redeem them.  Adding fuel to the fire is that the interest rates being paid on these ARS have fallen to zero.  The result, many investors are left holding positions that are illiquid and paying no interest.

Considering most of these investments were sold to investors seeking short-term growth with little risk and liquidity, the current prospects for the future are unacceptable. 

According to Aaron Pressman’s May 28, 2008 piece from BusinessWeek Online, while many municipalities have redeemed or are planning on redeeming the bonds they have issued, only one student loan issuer has announced a rescue plan.  The secondary markets are also failing to offer a solution for holders of these securities.

It is being reported that investors are likely to be stuck with as much as $70 billion worth of student loan-backed securities.  According to JP Morgan analyst Alex Roever, “current investors are at risk of having to hold positions until maturity, which in a few cases may be 40 years away.”            

Individual investors are not the only ones experiencing pains due to the frozen auction rate securities markets.  First quarter earnings show that more than 400 companies held at least $30 billion in these investment products.

Since February, the $330 billion auction rate market has largely been frozen.  Failed auctions continue even now, some four months later.  Large companies are struggling with how to price their holdings.  About half of the companies have written down the value of these securities.  The average markdown was 13.2%.

Companies are now looking for ways to handle their lack of liquidity.  Some are turning to secondary markets like Restricted Securities Trading Networks.  RSTN has arranged 200 auction rate sales with discounts ranging from 2% - 30%.

 About 25% of the $330 billion auction rate securities market has been bought back by municipalities or refinanced with new debt.  The remaining are likely not worth their face value. 

Ben Stein (yes, that Ben Stein from Ferris Bueller’s Day Off notoriety) penned an insightful piece in Sunday’s New York Times.  Mr. Stein, a frequent contributor to the Times, asks “how on earth did the credit crisis on Wall Street become such a catastrophe?”  Many investors are wondering the same thing.

 The NY Times Article, Wall Street, Run Amok, ponders a number of questions. Namely, weren’t fail-safe devices in place to guard against risk?  Weren’t government watchdogs supposed to be keeping an eye on things?  What about the policing role rating agencies?  Why are we in this mess?

In search of answers, Mr. Stein points the reader to a speech given on April 8th by David Einhorn.  Mr. Einhorn, who runs the successful hedge fund Greenlight Capital, stated that those who run big investment banks have an incentive to maximize assets and leverage themselves into trouble because their compensation is a function of how much debt they can pile on. 

Mr. Stein simplifies this position as follows: “If they (the investment banks) can use relatively low-interest debt to generate slightly higher returns, the firms earn more revenue and executive pay increases.”  Problems therefore arise concerning what type of assets are acquired with the debt.  

The most troubling aspect of Mr. Einhorn’s speech is his observation that the S.E.C. allowed brokerage firms to set their own valuations on assets and liabilities that were by their nature difficult to value.  The result, in essence, was that the hens were allowed to guard the hen house.

This Wall Street culture, and limited examination from regulators, has created an interesting paradox.  It is the old “heads I win, tails you lose” analogy.  If Wall Street’s big bets pay off, it is the firms and their executives who reap the benefit.  However, when things go south (as they did with the recent subprime debacle), it is individual investors and taxpayers who are left to pick up the pieces.

Mr. Stein’s conclusion is that the inmates are running the asylum.  I cannot disagree. 

Investors of some student-loan auction-rate securities are seeing unprecendented returns (and not in a good way).  Bloomberg is reporting that more than $9 billion of auction-rate bonds sold by student-loan agencies have trapped investors in debt that is not paying any interest.

Over the past few months, many auctions in these bonds have failed.  These failures have triggered certain provisions in the bond offering documents that limit the interest that agencies must pay.  The result, loans with no returns.

According to Bloomberg, the bonds are paying zero interest because of a formula designed to ensure that borrowers don’t pay more interest on their debt than they receive from their student-loan clients.  These provisions became effective after the auctions began to freeze and rates initially climbed to over 10%.

The collapse of the auction-rate market in February left many bond issuers, student-loan issuers included, unable to raise additional capital.  According to Thomson Reuters, no new municipal bonds backed by student loans were sold in the first quarter of this year, the first time this has occurred in almost 40 years.

One need only look at the daily headlines to see new victims of Wall Street’s creative subprime financing.  The fallout from the subprime crisis continues.    

On April 18, 2008 Morgan Asset Management, Inc., the investment advisor for RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc., RMK Multi-Sector High Income Fund, Inc. and RMK Strategic Income Fund, Inc., entered into an agreement with Hyperion Brookfield Asset Management, Inc. under which Hyperion became the new investment advisor for the Funds.  In addition, it was announced that Hyperion would also become the advisor of three Regions Morgan Keegan open-end funds, the Select Short Term Bond Fund, the Select Intermediate Bond Fund and the Select High Income Fund.

These Morgan Keegan funds have seen dramatic declines in value over the past year.  Many investors have suffered significant losses due to the funds’ over-exposure to subprime investments. 

It remains to be seen how these funds (and their performance) will be effected by the change in investment advisor.  For many investors, this change has come many months too late.   

Jefferson County Alabama, home to Birmingham and 660,000 residents, is facing some tough choices.  The county needs to raise more money or start cutting public goods and services.  If a solution is not found soon, Jefferson County may face default on their derivative contracts and possibly bankruptcy.  

According to Craig Karmin and Liz Rappaport of the Wall Street Journal, Jefferson engaged in $5.4 billion worth of certain derivative contracts, known as interest-rate swaps, in an effort to lower its borrowing costs.  The biggest piece of this borrowing was $3.2 billion to update the county’s water and sewage system. 

Jefferson finds itself in this difficult position as a result of several factors.  The ongoing credit crisis has caused downgrades to the county’s bond insurers, Financial Guaranty Co. and XL Capital Assurance Inc., and the recent auction-rate securities failures have prompted credit firms to lower the county’s debt rating from investment-grade to junk.   

On February 27, 2008, Moody’s lowered Jefferson County’s rating three levels from A3 to Baa3, the lowest investment grade.  

Bank of America, Bear Stearns Cos., J.P. Morgan Chase and Lehman Brothers, concerned over the county’s ability to meet its obligations, are now calling for Jefferson to put up more collateral for the swaps.  To date, Jefferson has failed to do so. 

The Wall Street Journal has reported that county officials are negotiating with creditors and maintaining that they can avoid bankruptcy.  James H. White III, president of Porter, White & Co., the county’s financial advisor, has stated that “[w]e don’t have any present intention to seek relief in bankruptcy court.”      

Like Jefferson County, many cities, towns, universities and other public institutions have taken on debt through the tax-exempt municipal bond market.  These debt markets are suffering from the fallout in the subprime mortgage crisis.  As a result, Jefferson County may not be alone in the struggle. It is expected that other municipalities may also see their swap agreements lose value.  Both Houston and Durham County, North Carolina have used interest-rate swaps to fund local projects.

CountryMark Cooperative filed a federal lawsuit in Indianapolis last week against Morgan Keegan (the brokerage subsidiary of Regions Financial Corp.) alleging violations of state and federal securities laws.  CountryMark contends that Morgan Keegan, its advisor, invested $10 million into mortgage-backed securities that contained subprime loans.

According to the Indianapolis Star, the co-op alleges that its $10 million note is in default and worthless because no trading market exists for it.

The CountryMark suit is the latest in a growing list of lawsuits and arbitrations filed against Morgan Keegan by investors.  As the subprime mortgage loan crisis continues, it can be expected that more and more investors will become aware of investment losses and will seek counsel.  Maddox Hargett & Caruso, P.C. has investigated these practices and has been retained by a number of investors seeking to recover their investment losses. 

If you have suffered losses at Morgan Keegan through investments containing mortgage-backed securities, we encourage you to contact us immediately so that we can evaluate the facts and circumstances surrounding how those investments were presented to you and whether this investment was appropriate for your investment portfolio.

Even as investors line up to file arbitration claims against Morgan Keegan relating to the sales and performance of several of their proprietary funds, two of their much maligned bond funds top the list of worst-performing bond funds for the January 2008.

RMK Select Intermediate Bond (RIBIX) and RMK Select High Income (RHIIX) saw total returns in January of -17.3% and -11.3% respectively.

As of December 31, 2007, these two funds had total combined assets of $145.2 million. 

As this  poor performance continues, it can be expected that more and more investors will file arbitration claims seeking recovery of their losses. The key focus in many of these claims will be on what disclosures were made (or not made) to investors who were sold these funds. Additionally, many claims already on file have claimed that these funds were pitched and sold as very safe, conservative investments not dissimilar from CDs. Clearly these investments cannot be compared to CDs or any other generally regarded safe, income producing investment.